Hussman on the markets
Much thanks to Charly Travers for sending this piece my way. This piece echoes a trend I’ve observed in my own valuation activity—in Gems and my personal holdings—and that Charly and I have pretty thoroughly hashed over: That the market at large is pricing a sustained recovery.
Herein, the author details a market pricing a return to 2007 sales and profitability levels by 2010-2011. For my part, while selected opportunities still exist, much of my valuation work has yielded similar conclusions. I’ll take it a step further. Anecdotally, a lot of my work’s shown a return to 2007 earnings thresholds, and continued strength thereafter. That may occur, and I don’t want to play the role of wet blanket. But I think that’s cause for caution in stock-picking.
Why? A lot of things have changed. For one, systemic levels of leverage have dramatically declined, and will in all likelihood remain reined in. This is particularly acute among consumers, whose net worth has substantially declined with housing price declines, declining portfolio values, and in turn, decreased availability to take loans to support consumption. Some of this leverage is likely to return, but I’d wager that if it does, it’ll only come slowly and (in likelihood) in differing forms.
For that matter, recent data has shown a decided shift [among U.S. consumers] from net spenders to net savers. Whether this is a secular trend remains to be seen. But in the event that persists, that should manifest in lower levels of consumption across the spectrum. Economically-sensitive purchases, or anything that can be delayed—industrials, consumer-oriented stocks, and the like—are most exposed to coming up short against this expectation. Those purchases are fungible
Viewed in context, I come down as before. It seems the market’s gotten a bit ahead of itself. There’s certainly a case for suggesting that economy can and will sustainably recover. But there’s also a decent case for suggesting that potential GDP, and in turn, consumption, has been at least temporarily and maybe permanently impaired. To me, that means valuations may indeed get better. If nothing else, I’m not getting excited about whole-hog, across-the-board buying.